Political Divide and the Composition of Households’ Equity Portfolios

Abstract

We examine the differences in the stock holdings of wealthy households in different counties of the U.S. with different political preferences over the past 25 years. Al- though political differences between counties have been increasing since at least 1996, it is not until 2013 when they started to increasingly and significantly contribute to differences in equity portfolio composition. Using the entry of a major conservative media network as a shock to county-level political preferences, we find evidence for a causal effect of political differences. We show that the effect of political differences on portfolio differences operates mainly through diverging political views on social and environmental issues rather than differences in economic expectations. Our study suggests that political polarization could reduce risk sharing and segment U.S. equity markets by political lines and – given the partisan segregation – geographical lines.

Keywords: Political preference, political polarization, equity portfolio composition, ESG

JEL Classification: G11, G41, G50